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Page 1 of 18
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ----------------
Commission File No. 0-20348
-------
D & K HEALTHCARE RESOURCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1465483
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8235 FORSYTH BOULEVARD, ST. LOUIS, MISSOURI
(Address of principal executive offices)
63105
(Zip Code)
(314) 727-3485
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X YES NO
------------- -------------
Indicate by check mark whether the registrant is an accelerated filer.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value 13,973,603
---------------------------- ----------
(class) (November 7, 2003)
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D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Index
Page No.
--------
Part l. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2003
and June 30, 2003 3
Condensed Consolidated Statements of Operations for the Three
Months Ended September 30, 2003 and September 30, 2002 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 2003 and September 30, 2002 5
Notes to Condensed Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Item 4. Controls and Procedures 12
Part ll. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Page 3 of 18
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
SEPTEMBER 30, JUNE 30,
2003 2003
--------- ---------
(unaudited)
ASSETS
Current Assets
Cash (including restricted cash of $12,517 and $14,301, respectively) $ 12,517 $ 14,301
Receivables, net of allowance for doubtful accounts of $1,604
and $1,604, respectively 100,507 122,982
Inventories 321,856 257,984
Other current assets 11,114 8,862
--------- ---------
Total current assets 445,994 404,129
Property and Equipment, net of accumulated depreciation and amortization of
$11,225 and $10,673, respectively 10,814 11,140
Other Assets 8,933 11,511
Goodwill, net of accumulated amortization 44,105 44,105
Other Intangible Assets, net of accumulated amortization 1,769 1,810
--------- ---------
Total assets $ 511,615 $ 472,695
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 1,510 $ 1,677
Accounts payable 174,357 173,342
Accrued expenses 11,535 13,471
--------- ---------
Total current liabilities 187,402 188,490
Long-term Liabilities 3,707 3,703
Long-term Debt, excluding current maturities 149,689 110,423
--------- ---------
Total liabilities 340,798 302,616
Stockholders' Equity
Common stock 152 152
Paid-in capital 125,502 124,704
Accumulated other comprehensive loss (1,179) (1,371)
Deferred compensation - restricted stock (1,105) (411)
Retained earnings 59,673 58,415
Less treasury stock (12,226) (11,410)
--------- ---------
Total stockholders' equity 170,817 170,079
--------- ---------
Total liabilities and stockholders' equity $ 511,615 $ 472,695
========= =========
The accompanying notes are an integral part of these statements.
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D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended September 30, (in thousands, except per share data)
2003 2002
--------- ---------
Net Sales $ 478,548 $ 533,966
Cost of Sales 460,460 512,913
--------- ---------
Gross profit 18,088 21,053
Operating Expenses 13,188 13,544
--------- ---------
Income from operations 4,900 7,509
Other Income (Expense):
Interest expense, net (2,147) (2,513)
Other, net 36 (54)
--------- ---------
(2,111) (2,567)
--------- ---------
Income before income tax provision and minority interest 2,789 4,942
Income Tax Provision (1,088) (1,952)
Minority Interest (234) (128)
--------- ---------
Net income before cumulative effect of accounting change 1,467 2,862
Cumulative effect of accounting change, net - (4,249)
--------- ---------
Net income (loss) $ 1,467 $ (1,387)
========= =========
Earnings (Loss) Per Share - Basic
Net income before cumulative effect of accounting change $ 0.11 $ 0.20
Cumulative effect of accounting change - (0.29)
--------- ---------
Net income (loss) $ 0.11 $ (0.09)
========= =========
Earnings (Loss) Per Share - Diluted
Net income before cumulative effect of accounting change $ 0.10 $ 0.19
Cumulative effect of accounting change - (0.29)
--------- ---------
Net income (loss) $ 0.10 $ (0.10)
========= =========
Basic common shares outstanding 13,956 14,553
Diluted common shares outstanding 14,194 14,850
The accompanying notes are an integral part of these statements.
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D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the 3 months ended September 30, (in thousands)
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,467 $ (1,387)
Adjustments to reconcile net income (loss) to net cash
flows from operating activities -
Depreciation and amortization 656 637
Amortization of debt issuance costs 407 276
Deferred income taxes 862 (1,903)
Cumulative effect of accounting change, net - 4,249
Decrease (increase) in receivables, net 22,475 (15,174)
(Increase) decrease in inventories (63,872) 6,738
Increase in other current assets (2,480) (3,629)
Increase (decrease) in accounts payable 1,015 (22,183)
(Decrease) increase in accrued expenses (1,936) 973
Other, net 1,837 135
--------- ---------
Net cash flows used in operating activities (39,569) (31,268)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (289) (1,147)
--------- ---------
Net cash flows used in investing activities (289) (1,147)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under revolving line of credit 545,613 212,147
Repayments under revolving line of credit (506,276) (181,026)
Payments of long-term debt (238) (275)
Payment of dividends (209) (219)
Purchase of treasury stock (816) (122)
--------- ---------
Net cash flows provided by financing activities 38,074 30,505
--------- ---------
Decrease in cash (1,784) (1,910)
Cash, beginning of period 14,301 11,754
--------- ---------
Cash, end of period $ 12,517 $ 9,844
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for -
Interest $ 1,760 $ 2,093
Income taxes, net $ 207 $ 13
The accompanying notes are an integral part of these statements.
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D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
D&K Healthcare Resources, Inc. (the "Company") is a full-service,
regional wholesale drug distributor, supplying customers from facilities in
Missouri, Florida, Kentucky, Minnesota, and South Dakota. The Company
distributes a broad range of pharmaceuticals and related products to its
customers in 26 states primarily in the Midwest, Upper Midwest, and South. The
Company focuses primarily on a target market sector, which includes independent
retail, institutional, franchise, chain store and alternate site pharmacies. The
Company also offers a number of proprietary information systems software through
two wholly owned subsidiaries, Tykon, Inc. and VC Services, Inc. (dba Viking
Computer Services). In addition, the Company owns a 70% equity interest in
Pharmaceutical Buyers, Inc. ("PBI"), a leading alternate site group purchasing
organization.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and include
all of the information and disclosures required by accounting principles
generally accepted in the United States of America for interim reporting, which
are less than those required for annual reporting. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) considered
necessary for a fair representation have been included. The results of
operations for the three-month period ended September 30, 2003, are not
necessarily indicative of the results to be expected for the full fiscal year.
These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and related notes
contained in the Company's 2003 Annual Report to Stockholders.
NOTE 2. STOCK-BASED COMPENSATION
The Company has adopted the disclosure requirements of Statement of
Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 amends SFAS 123, Accounting
for Stock-Based Compensation," to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
compensation and also amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
methods of accounting for stock-based employee compensation and the effect of
the method used on reported results. As permitted by SFAS 148 and SFAS 123, the
Company continues to apply the accounting provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Had the Company recorded compensation expense based on the estimated
grant date fair values, as defined by SFAS 123, for awards granted under its
stock option plans and stock purchase plan, the unaudited pro forma net income
and pro forma earnings per share would have been as follows (in thousands,
except per share data):
Three Months Ended
September 30,
-----------------------
2003 2002
---------- ----------
Net income (loss) - as reported $ 1,467 $ (1,387)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
tax (393) (339)
--------- ---------
Net income (loss) - pro forma $ 1,074 $ (1,726)
Earnings (loss) per share:
Basic - as reported $ 0.11 $ (0.09)
Basic - pro forma $ 0.08 $ (0.12)
Diluted - as reported $ 0.10 $ (0.10)
Diluted - pro forma $ 0.07 $ (0.12)
These pro forma amounts may not be representative of the effects for
future years as options vest over several years and additional awards are
generally granted each year.
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NOTE 3. GOODWILL AND INTANGIBLE ASSETS
The Company adopted Statement of Financial Accounting Standard ("SFAS")
No. 142, "Goodwill and Other Intangible Assets" effective July 1, 2002. Under
the new statement, impairment should be tested at least annually at the
reporting unit level using a two-step impairment test. The reporting unit is the
same as or one level below the operating segment level as described in SFAS
Statement 131, "Disclosures about Segments of an Enterprise and Related
Information" (see Note 8). Under step 1 of this approach, the fair value of the
reporting unit as a whole is compared to the book value of the reporting unit
(including goodwill) and, if a deficiency exists, impairment would need to be
calculated. In step 2, the impairment is measured as the difference between the
implied fair value of goodwill and its carrying amount. The implied fair value
of goodwill is the difference between the fair value of the reporting unit as a
whole less the fair value of the reporting unit's individual assets and
liabilities, including any unrecognized intangible assets. Under this standard,
goodwill and intangibles with indefinite lives are no longer amortized. A
discounted cash flow model was used to determine the fair value of the Company's
businesses for the purpose of testing goodwill for impairment. The discount rate
used was based on a risk-adjusted weighted average cost of capital.
As a result of this adoption and assessment, the Company recognized an
impairment loss of approximately $7.0 million ($4.2 million net of tax) during
the first quarter of fiscal 2003. This was recognized as the cumulative effect
of a change in accounting principle. This impairment results from an appraisal
valuation and relates to goodwill originally established for the acquisition of
Jewett Drug Co., which is included in the Company's wholesale drug distribution
segment.
Changes to goodwill and intangible assets during the three-month period
ended September 30, 2003 are: (in thousands)
Goodwill Intangible Assets
------------------------------
Balance at June 30, 2003, net of
accumulated amortization $44,105 $ 1,810
Amortization expense - (41)
------------------------------
Balance at September 30, 2003, net
of accumulated amortization $44,105 $ 1,769
Intangible assets totaled $1,769,000, net of accumulated amortization of
$348,000, at September 30, 2003. Of this amount, $214,000 represents intangible
assets with indefinite useful lives, consisting primarily of trade names that
are not being amortized under SFAS No. 142. The remaining intangibles relate to
customer or supplier relationships and licenses. Amortization expense for
intangible assets is expected to approximate $150,000 each year between 2004 and
2018.
Goodwill related to the wholesale drug distribution segment, net of
amortization, was $32.3 million as of September 30, 2003 and June 30, 2003.
Goodwill related to the PBI segment amounted to $10.4 million as of September
30, 2003 and June 30, 2003. Goodwill related to the Company's software segment
amounted to $1.4 million as of September 30, 2003 and June 30, 2003. Other
intangible assets related to the wholesale drug distribution segment, net of
amortization, were $0.2 million as of September 30, 2003 and June 30, 2003.
Other intangible assets related to the PBI segment amounted to $1.6 million and
$1.7 million as of September 30, 2003 and June 30, 2003, respectively. The
Company's software segment has no intangible assets.
NOTE 4. EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share", requires dual presentation of basic
and diluted earnings per share and requires a reconciliation of the numerators
and denominators of the basic and diluted earnings per share calculations. The
reconciliation of the numerator and denominator of the basic and diluted
earnings per share computations are as follows (in thousands, except for per
share amounts):
Page 8 of 18
Three-Months ended September 30, 2003 Three-Months ended September 30, 2002
---------------------------------------- ----------------------------------------
Income Shares Per-share Income Shares Per-share
(Numerator) (Denominator) (1) Amount (Numerator) (Denominator) (1) Amount
---------------------------------------- ----------------------------------------
Basic Earnings per Share:
Net income before cumulative effect of
accounting change, net $ 1,467 13,956 $ 0.11 $ 2,862 14,553 $ 0.20
Cumulative effect of accounting change,
net - - (4,249) - (0.29)
------------------------------- -------------------------------
Net income (loss) available to common
stockholders 1,467 13,956 (1,387) 14,553
Effect of Diluted Securities:
Options - 238 - 297
Convertible securities (63) - (29) -
------------------------------- --------------------------------
Diluted Earnings (Loss) per Share:
Net income (loss) available to common
stockholders plus assumed conversions $ 1,404 14,194 $ 0.10 $(1,416) 14,850 $(0.10)
======================================== ======================================
(1) Outstanding shares computed on a weighted average basis
NOTE 5. COMPREHENSIVE INCOME
The Company's comprehensive income (loss) consists of net income (loss)
and the net change in value of cash flow hedge instruments as follows:
(in thousands)
Three Months Ended
September 30,
---------- -- ----------
2003 2002
---------- ----------
Net income (loss) $ 1,467 $ (1,387)
Change in value of cash flow hedge, net of tax 192 (422)
---------- ----------
Total comprehensive income (loss) $ 1,659 $ (1,809)
========== ==========
NOTE 6. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is a party to financial
instruments with off-balance-sheet risk, such as standby letters of credit and
other guarantees, which are not reflected in the accompanying balance sheets. At
September 30, 2003, the Company was party to a standby letter of credit of
$750,000 and was the guarantor of certain customer obligations totaling
approximately $500,000. Management does not expect any material losses to result
from these off-balance-sheet items.
NOTE 7. LONG-TERM DEBT
On March 31, 2003, the Company announced that it had entered into a new
$600 million credit facility. The credit facility, an asset-based senior secured
revolving credit facility, increased its available credit from $430 million to
$600 million. The new single credit facility replaces a $230 million revolving
bank line of credit and a $200 million accounts receivable securitization
program. Under the credit facility, the total amount of loans and letters of
credit outstanding at any time cannot exceed the lesser of an amount based on
percentages of eligible receivables and inventories (the borrowing base formula)
and $600 million. Total credit available at September 30, 2003 was approximately
$250 million of which approximately $101 million was unused. The interest rate
on the new credit facility is based on the 30-day London Interbank Offering Rate
(LIBOR) plus a factor based on certain financial criteria. The interest rate was
3.37% at September 30, 2003. Borrowings under the new credit facility are
reported as long-term debt in the Company's financial statements.
NOTE 8. SEGMENT INFORMATION
Pursuant to SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," the Company has three identifiable business segments;
Wholesale drug distribution, the Company's interest in PBI, and Software. Two
wholly owned software subsidiaries, Tykon, Inc. and Viking Computer Services,
Inc., constitute the
Page 9 of 18
Software segment. Viking markets a pharmacy management software system and Tykon
developed and markets a proprietary PC-based order entry/order confirmation
system to the drug distribution industry.
Though the Wholesale drug distribution segment operates from several
different facilities, the nature of its products and services, the types of
customers and the methods used to distribute its products are similar and thus
they have been aggregated for presentation purposes. The Company operates
principally in the United States.
(In thousands) For The Three Months Ended
September 30, 2003 September 30, 2002
------------------- ---------------------
Net Sales -
Wholesale drug distribution $475,519 $531,657
PBI 2,319 1,612
Software 710 697
----------------------------
Total $478,548 $533,966
Gross Profit -
Wholesale drug distribution $ 15,204 $ 18,894
PBI 2,319 1,612
Software 565 547
----------------------------
Total $ 18,088 $ 21,053
Pre-tax income -
Wholesale drug distribution $ 1,372 $ 4,066
PBI 1,232 681
Software 185 195
----------------------------
Total $ 2,789 $ 4,942
Except as otherwise disclosed, there has been no material change in total
assets from the amount disclosed in the last annual report. Prior period segment
information has been reclassified to reflect PBI separately since PBI now
exceeds certain reporting criteria. There are no other differences in the basis
of segmentation or in the basis of measurement of segment profit or loss.
NOTE 9. SUBSEQUENT EVENT
On October 22, 2003, the Company announced that it had signed a definitive
agreement to acquire Walsh HealthCare Solutions, Inc. of Texarkana, Texas. Walsh
is a family-owned, full-service pharmaceutical distributor with distribution
centers located in San Antonio and Texarkana, Texas and Paragould, Arkansas.
Walsh had net sales of approximately $900 million in its most recent fiscal year
ended April 30, 2003. The transaction is expected to close by December 31, 2003.
Closing of the transaction is subject to receipt of required regulatory
approvals and other customary terms and conditions, as well as Walsh's
acquisition of 100% of the equity interests in a joint venture to which it is a
party. The acquisition purchase price of $99.25 million in cash includes the
repayment of all Walsh bank debt. The purchase price will be subject to
adjustment based on the net working capital at closing. D&K will utilize its
existing revolving credit facility to finance the transaction. Walsh serves
customers in Texas, Arkansas, Louisiana, Oklahoma, Kansas, Missouri, Illinois,
Tennessee, Kentucky and Mississippi. Approximately 96% of Walsh's sales are to
independent and regional pharmacy customers with the remaining 4% to hospitals
and other healthcare providers.
Page 10 of 18
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The discussion below is concerned with material changes in financial
condition and results of operations in the condensed consolidated balance sheets
as of September 30, 2003 and June 30, 2003, and in the condensed consolidated
statements of operations for the three-month periods ended September 30, 2003
and September 30, 2002, respectively. We recommend that this discussion be read
in conjunction with the audited consolidated financial statements and
accompanying notes included in our 2003 Annual Report to Stockholders.
Certain statements in this document regarding future events, prospects,
projections or financial performance are forward looking statements. Such
forward looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and may be identified by
words such as "anticipates," "believes," "estimates," "expects," "intends" and
similar expressions. Such forward-looking statements are inherently subject to
risks and uncertainties. The company's actual results could differ materially
from those currently anticipated due to a number of factors, including without
limitation, the competitive nature of the wholesale pharmaceutical distribution
industry with many competitors having substantially greater resources than D&K
Healthcare, the company's ability to maintain or improve its operating margins
with the industry's competitive pricing pressures, the company's customers and
suppliers generally having the right to terminate or reduce their purchases or
shipments on relatively short notice, the availability of investment purchasing
opportunities, the changing business and regulatory environment of the
healthcare industry in which the company operates, including manufacturer's
pricing or distribution policies or practices, changes in private and
governmental reimbursement or in the delivery systems for healthcare products,
changes in interest rates, ability to complete and integrate acquisitions
successfully, and other factors set forth in reports and other documents filed
by D&K Healthcare with the Securities and Exchange Commission from time to time.
The reader should not place undue reliance on forward-looking statements, which
speak only as of the date they are made. D&K Healthcare undertakes no obligation
to publicly update or revise any forward-looking statements.
We have renamed the national pharmacy chains trade class the `national
accounts' trade class. Given the changing composition of this class of trade we
feel this new name is more reflective of the broader nature of the business.
This is a name change only; we have not changed or restated the financial
results in any way.
RESULTS OF OPERATIONS
NET SALES Net sales decreased $55.4 million to $478.5 million, or
10.4%, for the three months ended September 30, 2003, compared to the
corresponding period of the prior year. Sales to independent and regional
pharmacies increased $38.6 million to $319.8 million, or 13.7%. Approximately
two-thirds of this increase relates to new business with the remainder tied to
same store growth. National accounts sales decreased $95.3 million to $127.9
million, or 42.7%, compared to last year primarily due to lower availability of
attractively priced purchase opportunities. We provide our national accounts
customers bulk pharmaceuticals that we purchase, if available, on favorable
terms from the manufacturers. If we are unable to obtain bulk inventory on
favorable terms, our sales in this area will decline.
GROSS PROFIT Gross profit decreased $3.0 million to $18.1 million, or
14.1%, for the three months ended September 30,2003, compared to the
corresponding period of the prior year. As a percentage of net sales, gross
margin decreased from 3.94% to 3.78% for the quarter ended September 30, 2003,
compared to the corresponding period of the prior year. The decrease in gross
profit was due to lower national accounts sales and fewer product price
increases, which resulted in lower gross profit margins.
OPERATING EXPENSES Operating expenses (including depreciation and
amortization) decreased $0.4 million to $13.2 million, or 2.6%, for the three
months ended September 30, 2003 compared to the corresponding period of the
prior year. The ratio of operating expenses to net sales was 2.76%, a 22 basis
point increase from the comparable
Page 11 of 18
period of the prior year. The decrease in operating expenses resulted primarily
from lower incentive compensation. The ratio of operating expense to net sales
increased due to the decrease in national accounts sales.
INTEREST EXPENSE, NET Net interest expense decreased $0.4 million to
$2.1 million, or 14.6%, for the three months ended September 30, 2003, compared
to the corresponding period of the prior year. As a percentage of net sales, net
interest expense decreased to 0.45% from 0.47%, compared to the corresponding
period of the prior year. The decrease in net interest expense was primarily the
result of lower average borrowing levels driven by lower average investment in
inventory partially offset by a higher average borrowing rate.
INCOME TAX PROVISION Our effective income tax rate was 39.0% for the
three months ended September 30, 2003, compared to 39.5% for the corresponding
period of the prior year. These rates were different from the statutory blended
federal and state rates primarily because of the impact of state income taxes.
Our effective rate is lower than the corresponding period of last year due to
the impact of the sales mix on the blended state income tax rate.
MINORITY INTEREST Minority interest was $0.2 million for the three
months ended September 30, 2003, compared to $0.1 million in the corresponding
period of the prior year. The increase relates to higher earnings at PBI as a
result of higher sales.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET As a result of the adoption
of Statement of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets", we recognized an impairment loss of approximately $7.0
million ($4.2 million net of tax) during the first quarter of fiscal 2003. This
impairment resulted from an appraisal valuation and related to goodwill
originally established for the acquisition of Jewett Drug Co. No such adjustment
was required in the current period.
LIQUIDITY AND CAPITAL RESOURCES
We generally meet our working capital requirements through a combination of
internally generated funds, borrowings under the revolving line of credit and
trade credit from our suppliers.
We use the following ratios as key indicators of our liquidity and working
capital management:
SEPTEMBER 30, JUNE 30,
2003 2003
--------------------------------
Working capital (000s) $258,592 $215,639
Current ratio 2.38 to 1 2.14 to 1
Working capital is total current assets less total current liabilities on
our balance sheet. The current ratio is calculated by dividing total current
assets by total current liabilities.
Working capital and current ratio at September 30, 2003 are higher than
June 30, 2003 levels. Inventory increased as a result of start of normal
seasonal builds that typically occur as we enter the December and March
quarters.
On March 31, 2003, the Company entered into a new $600 million credit
facility. The credit facility, an asset-based senior secured revolving credit
facility, increased our available credit from $430 million to $600 million. The
new single credit facility replaced a $230 million revolving bank line of credit
and a $200 million accounts receivable securitization program. Under the credit
facility, the total amount of loans and letters of credit outstanding at any
time cannot exceed the lesser of an amount based on percentages of eligible
receivables and inventories (the borrowing base formula) and $600 million. Total
credit available at September 30, 2003 was approximately $250 million of which
approximately $101 million was unused. The interest rate on the new credit
facility is based on the 30-day London Interbank Offering Rate (LIBOR) plus a
factor based on certain financial criteria. The interest rate was 3.37% at
September 30, 2003.
Page 12 of 18
Under the terms of the credit facility, we are required to comply with
certain financial covenants, including those related to a fixed charge coverage
ratio and tangible net worth. We are also limited in our ability to make loans
and investments, enter into leases, or incur additional debt, among other
things, without the consent of our lenders. We are in compliance with the debt
covenants as of September 30, 2003.
Net cash outflows used in operating activities totaled $39.6 million for
the three months ended September 30, 2003 with net cash used in operating
activities of $31.3 million in the prior year. Working capital changes and the
timing of accounts payable and accounts receivable payments account for the
difference between periods.
We invested $0.3 million in capital assets in the three months ended
September 30, 2003 compared with $1.1 million in the previous year. The prior
year expenditures were primarily related to leasehold improvements associated
with our new corporate offices that were completed during fiscal 2003. We
believe that continuing investment in capital assets is necessary to achieve our
goal of improving operational efficiency, thereby enhancing our productivity and
profitability.
Net cash inflows provided by financing activities totaled $38.1 million for
the three months ended September 30, 2003 with net cash provided by financing
activities of $30.5 million for last year. Borrowings under our revolving line
of credit related to the increase in inventory levels offset with our purchase
of treasury stock produced this result.
Stockholders' equity increased $0.7 million to $170.8 million at September
30, 2003 from $170.1 million at June 30, 2003, due to the net earnings during
the period offset by the impact of our purchase of treasury stock during the
quarter. We acquired an additional 56,500 shares in the open market during the
quarter. In September 2002, the board of directors authorized the repurchase of
up to 1.0 million shares. As of September 30, 2003, 656,500 shares had been
repurchased and the board authorization expired. We believe that funds available
under the new credit facility, together with internally generated funds, will be
sufficient to meet our capital requirements for the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary exposure to market risk consists of changes in interest rates
on borrowings. An increase in interest rates would adversely affect the
operating results and the cash flow available to fund operations and expansion.
Based on the average variable borrowings during fiscal 2003, a change of 25
basis points in the average variable borrowing rate would result in a change of
approximately $0.6 million in annual interest expense. We continually monitor
this risk and review the potential benefits of entering into hedging
transactions, such as interest rate swap agreements, to mitigate the exposure to
interest rate fluctuations.
ITEM 4. CONTROLS AND PROCEDURES
Based on an evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) as of the end of the period covered by this
report, our Chief Executive Officer and our Chief Financial Officer have
concluded that such controls and procedures were effective as of the end of the
period covered by this report. In connection with such evaluation, no change in
the Company's internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended)
occurred during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
Page 13 of 18
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Part ll. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on page 15.
(b) Reports on Form 8-K
1. On August 7, 2003, the registrant filed a Current
Report on Form 8-K under Item 12 with a press
release announcing its financial results for the
fourth quarter and full year of fiscal 2003.
Page 14 of 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
D & K HEALTHCARE RESOURCES, INC.
Date: November 12, 2003 By: /s/ J. Hord Armstrong, III
------------------ -----------------------------------
J. Hord Armstrong, III
Chairman of the Board and
Chief Executive Officer
By: /s/ Thomas S. Hilton
-----------------------------------
Thomas S. Hilton
Senior Vice President
Chief Financial Officer
(Principal Financial &
Accounting Officer)
Page 15 of 18
EXHIBIT INDEX
Exhibit No. Description
3.1* Restated Certificate of Incorporation, filed as an exhibit to
registrant's Registration Statement on Form S-1 (Reg. No. 33-48730).
3.2* Certificate of Amendment to the Restated Certificate of
Incorporation of D&K Wholesale Drug, Inc filed as an exhibit to the
registrant's Annual Report on Form 10-K for the year ended June 30,
1998.
3.3* Certificate of Designations for Series B Junior Participating
Preferred Stock of D&K Healthcare Resources, Inc. filed as an
exhibit to the registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001.
3.4* By-laws of the registrant, as currently in effect, filed as an
exhibit to registrant's Registration Statement on Form S-1 (Reg. No.
33-48730).
3.5* Certificate of Amendment of Certificate of Incorporation of D&K
Healthcare Resources, Inc., filed as an exhibit to registrants
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.
4.1* Form of certificate for Common Stock, filed as an exhibit to
registrant's Registration Statement on Form S-1 (Reg. No. 33-48730).
4.2* Form of Rights Agreement dated as of November 12, 1998 between
registrant and Harris Trust and Savings Bank as Rights Agent, which
includes as Exhibit B the form of Right Certificate, filed as an
exhibit to Form 8-K dated November 17, 1998.
31.1** Section 302 Certification of Chief Executive Officer.
31.2** Section 302 Certification of Chief Financial Officer.
32** Section 1350 Certification of Chief Executive Officer and Chief
Financial Officer.
* Incorporated by reference.
** Filed herewith.